China Reinsurance (Group) Corporation's (HKG:1508) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

It is hard to get excited after looking at China Reinsurance (Group)'s (HKG:1508) recent performance, when its stock has declined 13% over the past three months. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on China Reinsurance (Group)'s ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for China Reinsurance (Group)

How Is ROE Calculated?

ROE can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for China Reinsurance (Group) is:

21% = CN¥4.6b ÷ CN¥22b (Based on the trailing twelve months to March 2022).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every HK$1 worth of equity, the company was able to earn HK$0.21 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

A Side By Side comparison of China Reinsurance (Group)'s Earnings Growth And 21% ROE

At first glance, China Reinsurance (Group) seems to have a decent ROE. On comparing with the average industry ROE of 9.7% the company's ROE looks pretty remarkable. This probably laid the ground for China Reinsurance (Group)'s moderate 5.3% net income growth seen over the past five years.

As a next step, we compared China Reinsurance (Group)'s net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 8.3% in the same period.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is China Reinsurance (Group) fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is China Reinsurance (Group) Making Efficient Use Of Its Profits?

With a three-year median payout ratio of 30% (implying that the company retains 70% of its profits), it seems that China Reinsurance (Group) is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Additionally, China Reinsurance (Group) has paid dividends over a period of six years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 30% of its profits over the next three years. Still, forecasts suggest that China Reinsurance (Group)'s future ROE will drop to 7.8% even though the the company's payout ratio is not expected to change by much.

Summary

On the whole, we feel that China Reinsurance (Group)'s performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see a good amount of growth in its earnings. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.